Tuesday, November 24, 2009

Explosive 2010. US commercial real estate, bond bubbles

The US faces a real danger of its commercial real estate bubble bursting, its residential real estate prices still have a long way to fall, and also it has a real big US bonds bubble. Also, the world, particularly the Asian exporting nations, have to keep on printing and buying US dollar to prevent their own currencies from rising too fast and thus hurting their exports (this is a wrong assumption by economists). The money supply will be crazy, not just in the US but the entire world. Well, it has already been crazy for the past 4 decades.

I think 2010 will be a really explosive year for gold and silver. Gold is already up 30+% this year, silver up 70+% (get your money out of banks, they give you way less than 1%, and you lose out to 7% inflation on average). Both have been in a 9-year bull run, and they still have a long way to go. There will be minor corrections along the way as investors cash in for profits, but those will just be minor blips in this bull run.

Very soon, we won't be able to see spot price of silver at below USD 20. Grab them by the truckloads while you can!

If the world is REALLY recovering, gold prices will crash. It has been setting record highs on almost a daily basis recently. Funny how it has gone up from $250 to $1170 now and people still think the world economy is good. Some argue that the gold is in a bubble, but it's far from the case.

Excess reserves in the U.S. banking system stood at an unprecedented $855 billion recently, up from $2 billion last year - according to Hayman Advisors, a Dallas, Tex.-based hedge fund firm run by Kyle Bass. Wait till they unleash these cash into the market in the form of loans. We'll see the multiplier effect of the fractional reserve banking system at work at full steam. Eventually, the $855 billion will balloon by several multiples (theoretically a multiplier of 9-10 if the reserve ratio is 10%, historically it's about 7). With a multiplier effect of 7, about $6 trillion will end up in the system. That's massive inflation.

Here's my rough calculation: Take this $6 trillion and divide by the total amount of gold in the world (about 150 tonnes), you'll get about  US$1,244  increase in the price of 1 troy ounce of gold (easily doubling today's price!!!). Just from this 'relatively' small amount of cash that the banks are holding. How about all the money that the country has printed (and inflated further by an average of 7 times) over the past 4 decades, ever since the world currencies ceased being backed by gold? What about the derivatives? The ratio of paper promises (eg. futures, options, notes, ETFs, etc) to physical gold is huge. I've seen varying estimates from different sources, so I can't quote an exact ratio here, but one thing that's certain is that this ratio is really huge. What about the gold supply from gold mines? It has been declining since 2000, and many experts agree that we're already past the peak production of gold. Given all these, gold prices will shoot to the stratosphere. It's an unimaginable number, something I've covered in a post 2 months back. Throw some caution to the wind though, because if the world decides that paper currency is really all good and sound, then gold prices may not go up that high (which is why I favoured buying silver far more than gold, because silver is still way depressed). But given that the governments around the world have "no choice" but to keep on printing, this scenario is unlikely.

It doesn't matter whether the Dow can stay above 10k, bla bla bla. It's the real purchasing power of the currency that matters. Stock market may go up, nominal value may go up, but it'll lose out to inflation. Doesn't matter if the government (by printing money and borrowing from foreigners) can insure every person's deposit in the bank, if those deposits are going to be able to buy less and less. Doesn't matter that the US GDP  growth for the 3rd quarter 2009 is positive, when half of it comes from the cash-for-clunkers program (the govt encourages people to trade in their perfectly fine debt-free old cars for $4,500, those cars get destroyed and then these people go further into debt to buy new cars),  and a significant other % from housing construction (what? they have 20 million empty homes and they're still building more?) .

All these phony talks, fed by the mainstream media to the population, designed to mislead the uninformed public.

When the public comes to its senses, up, up and away the gold price (and silver of course!) will go.

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